Basel II an opportunity Mikael Inglander, Chief Financial Officer - - PowerPoint PPT Presentation

Basel II – an opportunity

Mikael Inglander, Chief Financial Officer Anders Karlsson, Chief Risk Officer

Contents

• Introductory remarks
• Basel II

– Capitalisation – stakeholders – RWA calculation – A transition period – A comprehensive and generic risk process – Implementation – risk information of operational importance – Implementation – risk information of strategic importance

• The loan portfolio – does Basel II make sense?

– Lending to the public – Residential properties – Municipalities, agriculture, forestry, and Swedbank Finance – The remaining portfolio

• Concluding remarks

Opening remarks

• Basel II confirms Swedbank’s low risk profile
• There is a transition period of three years with a gradual capital release possibility
• The FSA is starting its evaluation of the Bank’s approach to Pillar 2
• Internal calculations and stress tests confirm a strong income statement, a strong

balance sheet and consequently a potential capital release

• Asset quality and collateralisation with a significant mortgage portfolio

characterized by very low historical and expected losses

• Good diversification of credit risk between countries, customer segments and

industries where Hansabank increases the diversification

• High, stable capital generation
• Sound risk, capital and performance management where Swedbank’s

implementation of new risk management tools supports the goal of being the leading service provider and will further improve the quality of our loan portfolio

Shareholders

Swedbank’s stakeholders

Capitalisation

Swedbank Society

Financial Stability

Legislation Supervision

Debt Investors

Repayment of debts

Customers

A sustainable bank with good reputation

Risk Premium or avoid investment Change to another bank

Changing the Landscape

Basel 2 Minimum Capital Requirements vs Basel I 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

2006 2007 2008 2009 2010

Swedbank a clear beneficiary of new regulation

Pillar 1 – QIS 5 supports a gradual capital release

Transition period

• A new complexity to manage

2006 2007 2008 2009 2010

Capital Requirement

Basel I Basel II Pillar 1

Basel II Hypothetical Long Term Capital Level

Basel I Transition Period Basel II Full Effect

Transitional Minimum Capital Level Hypothetical Pillar 2 buffer

A comprehensive and generic risk process

Covering all risks

Prevent risks Control and monitor Quantify risk Suggest measures & actions Report Identify risk Analyse

Op-Risk Policy Credit Policy Compliance Policy AML Policy Fin-Risk Policy Value at Risk Self Assessments NPAP Credit Process Credit Watch List Risk Factors Sensitivites PD and LGD OLDB Stress Testing Sensitivity Analysis Sector Analysis Migration Analysis Scenario Analysis In-depth Analysis Actions Follow Up Loss Analysis Income Statement Tier 1 and Tier 2 Limit Control Risk&Threat New Regulations BoD Monthly BoD Semi Annual BoD Annually CEO & SBAs daily CEO & SBA Ad-hoc CEO Monthly

Credit management

• Mandate structure

a function of risk classification

• A differentiated

credit process

• Portfolio analysis

A consistent implementation of new management and business tools

Business management

• Risk adjusted

pricing tool

• Customer

segmentation

Performance management

• Risk adjusted

performance measurements

• Balance

scorecards

Risk information

• f operational importance

Customer Corporate Manager Branch Local Bank Region Swedish Banking

• Risk adjusted pricing and performance measurement
• Risk adjusted credit process
• Enhanced navigation equipment in a competitive landscape
• A comprehensive view on customer needs

To be the leading service provider is supported by a consistent implementation

• Rapid decisions by using scoring
• A professional counterpart
• A Customer adjusted sales and offering process
• A potential capital release supports the strategy of capturing:
• current growth
• future organic growth
• new growth
• A comprehensive view on material risks
• Enhanced focus on minimizing unwanted risks
• Further improvement of quality in the loan portfolio
• Increased transparency

Customers Growth Risk management Cost efficiency Professionalism

• Time release for advise and sales through an efficient credit process
• Efficient resource allocation through improved management tools

Capital management in Swedbank

A conceptual view of the risk and capital management process Capital goal

• Capital Levels
• Capital Ratios
• Capital Structure
• Capital Strategy

Iteration

Prevent risks Control and monitor Quantify risk Suggest Measures Report Identify risk Analyse

Risk Profile Risk Profile

Risk Profile

Risk Tolerance Adverse Scenarios Strategic Planning Simulation

• RWA
• P/L
• T1

Risk Capital Needed Qualitative Strategic Discussion

Swedbank’s Lending to the Public

SEK 890 bn as of Sep. 2006

67,407 47,321 99,223 146,204 529,247

Municipalities Residental properties Corporate collateral Guarantees, unsecured Other collateral

Swedbank’s loan losses 1998 – 2006

% of lending to the public

0,00% 0,05% 0,10% 0,15% 0,20% 0,25% 0,30% 0,35% 0,40% 1998 1999 2000 2001 2002 2003 2004 2005 Q1-3 2006

0%

Swedbank grows in low-risk retail segments

Change in loan portfolio, by sector, SEK billion

100 200 300 400 500

• f which Swedbank Mortgage

Private individuals Real estate management Retail, hotels and restaurants Construction Manufacturing Transportation Forestry and agriculture Other service businesses Other corporate lending Municipalities

Dec 2004 Dec 2005 Sep 2006

Hansabank’s growth is diversifying the risk

Change in loan portfolio, by sector, EUR m

500 1 000 1 500 2 000 2 500 3 000 3 500 4 000 Private mortgages Other private individuals Manufacturing Wholesale and retail Real estate Transportation Education and student loans Municipalities and Energy, gas Agriculture and forestry Other business services Construction Hotels and restaurants Financial intermediaries Other

2004 2005 Sep

Hansabank’s loan portfolio is well diversified

Portfolio split by country and industry, EUR 13.2 bn

500 1 000 1 500 2 000 2 500 3 000 3 500 4 000 4 500

Private mortgages Other private individuals Manufacturing Wholesale and retail Real estate, renting Transportation Education and student loans Municipalities and government Energy, gas Agriculture and forestry Other business services Construction Hotels and restaurants Financial intermediaries Other

Russia Lithuania Latvia Estonia

EUR M

Residental properties

MSEK 529,247

64,855 107,104 357,288 Single family homes Multi-family housing Condominiums

Residential properties, a low-risk segment

0.00% 0.05% 0.10% 0.15% 0.20% 1998 1999 2000 2001 2002 2003 2004 2005 2006 Q3 Private Corporate

Historical loan losses

Portfolio risk profile Sep 2006

Swedbank Mortgage - retail

• 82% of the portfolio has a Probability
• f Default (PD) below 0.10%
• Retail mortgages amount to 43% of

the Swedbank’s loan portfolio

• Historically, extremely low loan losses
• The average loan-to-value ratio in

Swedbank Mortgage’s loan portfolio is 45 %

• Well-diversified
• Strong asset quality
• Conservative LTV ratios

10 20 30 40 50 60 70 <30% 30-60% 60-70% 70-75% 75-85% 85-100% >100%

Percent

Distribution of loan to value

Probability of Default Distribution Swedbank Mortgage as of Sep 2006

20 000 40 000 60 000 80 000 100 000 120 000 140 000 160 000 180 000

Default 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 Probability of Default

MSEK

Portfolio risk profile

Hansabank’s private mortgage portfolio risk profile Sep 2006, EUR 3.8 bn

Mortgage portfolio loan-to-value distribution

0% 5% 10% 15% 20% 25% 30% <40% 40% - 60% 60% - 70% 70% - 80% 80% - 90% >90%

% of portfolio

• Mortgage portfolio is 30% of total loan

portfolio

• Distribution of portfolio exposure by

rating classes similar in all countries

• High concentration of exposure in the top

4-5 rating classes

• Weighted average predicted PD for

mortgages is ~ 0.42%

• Loan-to-value for 66.8% of mortgage

portfolio is below 70% (analysis is based

• n property values on date of issuing

loan)

• Increases Hansabank diversification
• Strong asset quality
• Conservative LTV ratios

Distribution of loan to value Mortgage

0% 5% 10% 15% 20% 25% 30% 35% 40% 0 1 2 3 4 5 6 7 8 9 1011 1213 1415 16 1718 1920 21

PD

100 200 300 400 500 600 700

Exposure, €mio

Other collateral and municipalities

Forestry/agriculture, leasing and municipalities

SEK 67,407 M SEK 47,321 M

9 26 32 Forestry and agriculture LTV <75% Swedbank Finance Other collateral 16 Municipalities 31 Municipalities guarantee

0,00% 0,02% 0,04%

1998 1999 2000 2001 2002 2003 2004 2005 2006 Q3

0,00% 0,02% 0,04% 0,06% 0,08% 0,10% 0,12% 0,14% 0,16% 0,18% 0,20%

1998 1999 2000 2001 2002 2003 2004 2005 2006 Q3

Historical losses forestry/agriculture Historical losses municipalities incl guarantees

The remaining portfolio

SEK 302 bn

0,0% 0,2% 0,4% 0,6% 0,8% 1,0% 1,2% 1,4% 1,6% 1,8% 2,0%

1998 1999 2000 2001 2002 2003 2004 2005 2006 Q3

The remaining portfolio

Commercial properties, 31 Industrial properties, 37 Other properties, 28 Chattel mortgages, 13 Other collateral, 47 Guarantees, 16 Unsecured, 83

Large corporates 50% Retail 50% Historical loan losses

302

Loan losses – a hypothesis

Assume P&L of 12 bn as 1st line of defence

0,0% 0,5% 1,0% 1,5% 2,0% 2,5% 3,0% 3,5% 4,0%

1998 1999 2000 2001 2002 2003 2004 2005 2006,Q3 Hypothetic

0,0% 0,5% 1,0% 1,5% 2,0% 2,5% 3,0% 3,5% 4,0% 1998 1999 2000 2001 2002 2003 2004 2005 2006 Q3 Hypothetic

• Basel II indicates a lower RWA
• Historical loan loss data

indicates the same even on total portfolio level (890bn)

• Ceteris Paribus – Swedbank’s

Income Statement is a strong 1st line of defence

• Historical loan loss data on the

remaining portfolio with less conservative collateralisation (302 bn) strongly suggests the same conclusions

The ”Remaining” Portfolio (302bn) Lending to the public (890bn)

Concluding remarks

• Basel II confirms Swedbank’s low risk profile
• There is a transition period of three years with a gradual capital release possibility
• The FSA is starting its evaluation of the Bank’s approach to Pillar 2
• Internal calculations and stress tests confirm a strong income statement, a strong

balance sheet and consequently a potential capital release

• Asset quality and collateralisation with a significant mortgage portfolio

characterized by very low historical and expected losses

• Good diversification of credit risk between countries, customer segments and

industries where Hansabank increases the diversification

• High and stable capital generation
• Sound risk, capital and performance management where Swedbank’s

implementation of new risk management tools supports the goal of being the leading service provider and will further improve the quality of our loan portfolio